Much is riding on new Tesla’s mass appeal

This undated image provided by Tesla Motors shows the Tesla Model 3 sedan. The electric car company's newest vehicle, the Model 3, which was going to its first 30 customers late Friday, is half the cost of previous models. Its $35,000 starting price and 215-mile range could bring hundreds of thousands of customers into Tesla's fold, taking it from a niche luxury brand to the mainstream. Courtesy of Tesla Motors via AP

FREMONT, Calif. — It has been touted as Tesla’s first “mass-market” electric car – one that would lower the entry barrier into the company’s luxury niche.

When Tesla’s long-awaited Model 3 was rolled out to the first 30 recipients Friday night in Fremont, prospective buyers, auto industry insiders, tech enthusiasts and anyone who had shelled out a $1,000 reservation deposit was undoubtedly looking to see whether the car lives up to its billing as a vehicle with broad appeal.

For many, that breadth of that appeal hinges on the price tag.

Tesla has released few details about the pricing structure of its new car, only noting that it will start at $35,000 and that people will be able to customize some features whose costs are unknown.

There are the rebates in a handful of states that could lower the price for eligible customers and the $7,500 federal income tax credit whose benefits could be seen during tax time. But the tax credit only lasts until the company reaches its 200,000th electric vehicle sold in the United States, and the company has already sold more than 100,000 vehicles.

Tesla hasn’t released Model 3 order numbers since May 2016, when it said that 373,000 reservations had been placed.

A variety of customizations, meanwhile, such as different motor options, enhanced battery life, enhanced autopilot and larger wheels could push the Model 3’s price well above $40,000, analysts say. At that cost, experts say, the Model 3 would soar past the price of the average new car sold, as well as any vehicle that might be considered “mass market.” Analysts say the Model 3 is an aspirational vehicle.

“The average transaction price for a new car is about $36,000,” said Rebecca Lindland, an executive analyst at Kelley Blue Book. “That’s the sweet spot that new car buyers can afford.” Lindland added that mass-market buyers aren’t necessarily the middle class.

She expects the Model 3 to appeal to a category of buyers known as “early adopters.” These are consumers who are slightly more risk averse and have less wealth than the “innovators” who purchased the Model X and the Model S.

Only about 5 percent of all Americans buy a brand new car each year. And auto prices hit an all-time high in 2016, increasing 2.7 percent from the year before and nearly 13 percent since 2011, according to Edmunds.com, which tracks auto prices.

STRETCHING LOANS LONGER THAN EVER

Despite increasing auto prices, people are still buying cars in record numbers in the United States. Sales for 2016 set a record of 17.6 million cars and trucks, a slight increase over the 17.5 million vehicles sold the year before, according to figures from sales tracker Autodata.

To make those purchases possible, analysts say, growing numbers of new car buyers are stretching loans longer than ever before. The average car loan is $30,534 and the average loan is 68 months, according to Experian. But analysts say new car buyers are stretching loans out as long as 84 months or 7 years. Personal finance experts have advised that people keep auto loans to 4 years.

“I think a lot of folks will be leasing the Model 3,” Bankrate.com analyst Claes Bell said, noting that the vehicle will be priced higher than most middle income buyers can afford. “They’re not going to have anything to show for it at the end of the lease, but people may be inclined to pay more than they can afford in this case.”

Musk has made clear his desire to bring “compelling mass-market electric cars” to the world, noting in a 2013 blog post that if the company could’ve achieved that mission with their first product, they would have. Due to the limitations of a startup, he wrote, Tesla opted to build a sports car that had the “best chance of being competitive with its gasoline alternatives.”

He suspected, he wrote, that Tesla’s initial offering could be misinterpreted as company officials “believing that there was a shortage of sports cars for rich people.”

‘THIS CAR IS A DEVICE ON WHEELS’

But many observers say that air of exclusivity, paired with Tesla’s futuristic branding, is exactly its appeal.

Roger Pressman, the founder of EVannex – a Tesla aftermarket accessories company – may be one of the few people outside of Tesla who received a glimpse of the Model 3’s emerging demographic. That glimpse began when he stood in line with several hundred people anxious to put down their deposit for the vehicle last year.

Pressman then published a book called “Getting Ready for Model 3: A Guide for Future Tesla Model 3 Owners,” which has made him a popular resource for prospective buyers hoping to learn more about the car.

At a glance, Pressman said, Model 3 buyers are between the ages of 25 and 45 and most have never owned an electric vehicle. They’re drawn to Tesla, he said, because of the cachet of Musk’s futuristic vision and their desire to drive an environmentally friendly vehicle.

“People in that age range are very used to using devices and this car is a device on wheels,” Pressman said. “I do think the demographic will be very similar to the demographic that buys the BMW 3 Series,” he added. “Model 3 buyers are younger people, a lot of single people, maybe some couples. For families, however, the trend in the U.S. is still to own an SUV.”

Even Musk has acknowledged that the vehicle’s price – with only an average option mix – will top $40,000.

“In the U.S., the median household income is $56,516,” Bell said. “At that income, a lot of folks are going to have a hard time affording a vehicle around $30,000 in price, much less anything higher.”

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